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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-11263
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Exide Technologies
(Exact Name of Registrant as Specified in Its Charter)
Delaware 23-0552730
(State or Other (I.R.S. Employer
Jurisdiction of Identification No.
Incorporation or
Organization)
210 Carnegie Center, Suite 500 Princeton, New Jersey 08540
Telephone: (609) 627-7200
(Address, including zip code, and telephone number, including
area code, of Registrant's Principal Executive Offices)
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Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act
Title of each Class
Common Stock, $.01 par value
Preferred Share Purchase Rights
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [_] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of August 14, 2002 was approximately $15,882,188. There were
27,383,084 outstanding shares of the Registrant's common stock as of August 14,
2002.
(DOCUMENTS INCORPORATED BY REFERENCE)
None.
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EXIDE TECHNOLOGIES
TABLE OF CONTENTS
Page
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PART I
Item 1 BUSINESS................................................... 2
Item 2 PROPERTIES................................................. 16
Item 3 LEGAL PROCEEDINGS.......................................... 17
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 19
PART II
Item 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................ 20
Item 6 SELECTED FINANCIAL DATA.................................... 21
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................. 22
Item 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS...................................................... 39
Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 41
Item 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................ 41
PART III
Item 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......... 42
Item 11 EXECUTIVE COMPENSATION..................................... 44
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................. 50
Item 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 51
PART IV
Item 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K................................................... 53
SIGNATURES............................................................. 55
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE................ F-1
EXIDE TECHNOLOGIES
PART I
Item 1. Business
(1) Overview
Unless otherwise indicated references to any "fiscal year" means the year
ended March 31 of that year (e.g., "fiscal 2002" refers to the period beginning
April 1, 2001 and ending March 31, 2002, "fiscal 2001" refers to the period
beginning April 1, 2000 and ending March 31, 2001 and "fiscal 2000" refers to
the period beginning April 1, 1999 and ending March 31, 2000).
Bankruptcy Considerations
On April 15, 2002 ("Petition Date") Exide Technologies (together with its
subsidiaries unless the context requires otherwise, "Exide" or the "Company")
and three of its wholly-owned, U.S. subsidiaries (RBD Liquidation, LLC, Exide
Delaware, LLC and Exide Illinois, Inc.; together with Exide collectively, the
"Debtors") filed voluntary petitions for reorganization under Chapter 11 of the
federal bankruptcy laws ("Bankruptcy Code" or "Chapter 11") in the United
States Bankruptcy Court for the District of Delaware ("Bankruptcy Court") under
case numbers 02-11125 through 02-11128 (jointly administered for procedural
purposes before the Bankruptcy Court under case number 02-11125JCA).
The Debtors are currently operating their business as debtors-in-possession
pursuant to the Bankruptcy Code.
The Company decided to file for reorganization for itself and certain of its
subsidiaries under Chapter 11 as it offered the most efficient alternative to
restructure its balance sheet and access new working capital while continuing
to operate in the ordinary course of business. The Company has a heavy debt
burden, caused largely by a debt-financed acquisition strategy and the
significant costs of integrating those acquisitions. Other factors leading to
the reorganization included the impact of current adverse economic conditions
on the Company's markets, particularly the telecommunications industry, ongoing
competitive pressures, and recent capital market volatility. These factors
contributed to a loss of revenues and resulted in significant operating losses
and negative cash flows, severely impacting the Company's financial condition
and its ability to maintain compliance with debt covenants.
As debtors in possession under Chapter 11, the Debtors are authorized to
continue to operate as an ongoing business, but may not engage in transactions
outside the ordinary course of business without the approval of the Bankruptcy
Court. The Company's operations outside of the U.S. are not included in the
Chapter 11 proceedings. However, in connection with the Chapter 11 filing, the
Company entered into a "Standstill and Subordination Agreement" with its
Pre-Petition Senior Secured Credit Facility Lenders, whereby the lenders have
agreed to forbear collection of principal payments on foreign borrowings under
the pre-petition facility from non-debtor subsidiaries until December 2003,
subject to earlier termination upon the occurrence of certain events. A
description of the pre-petition credit agreement and certain of its conditions
appears in this Report at Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations.
On May 10, 2002 the Company received final Bankruptcy Court approval to
access its entire $250 million debtor-in-possession ("DIP") financing facility
("DIP Credit Facility"). The DIP Credit Facility will be used to supplement
cash flows from operations during the reorganization process including the
payment of post-petition ordinary course trade and other payables, the payment
of certain permitted pre-petition claims, working capital needs, letter of
credit requirements and for other general corporate purposes. A more detailed
description of the DIP Credit Facility appears in this Report at Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
2
Under Section 362 of the Bankruptcy Code, actions to collect pre-petition
indebtedness, as well as most other pending litigation, are stayed. Absent an
order of the Bankruptcy Court, substantially all pre-petition liabilities are
subject to settlement under a plan of reorganization to be approved by the
Bankruptcy Court. Although the Debtors expect to file a reorganization plan
that provides for emergence from bankruptcy as a going concern, there can be no
assurance that a reorganization plan will be proposed by the Debtors or
confirmed by the Bankruptcy Court, or that any such plan will be successfully
implemented.
Under the Bankruptcy Code, the Debtors may also assume or reject executory
contracts, including lease obligations, subject to the approval of the
Bankruptcy Court and certain other conditions. Parties affected by these
rejections may file claims with the Bankruptcy Court in accordance with the
reorganization process. Due to the timing of the Chapter 11 proceedings, the
Company cannot currently estimate or anticipate what impact the rejection and
subsequent claims of executory contracts may have on the reorganization process.
On June 14, 2002, the Company filed with the Bankruptcy Court schedules and
statements of financial affairs setting forth, among other things, the assets
and liabilities of the Debtors as shown by our books and records on the
Petition Date, subject to the assumptions contained in certain notes filed in
connection therewith. All of the schedules are subject to further amendment or
modification. The Bankruptcy Code provides for a claims reconciliation and
resolution process, although a bar date for filing claims has not yet been
established. As the ultimate number and amount of allowed claims is not
presently known, and because any settlement terms of such allowed claims are
subject to a confirmed plan of reorganization, the ultimate distribution with
respect to allowed claims is not presently ascertainable.
The United States Trustee has appointed an unsecured creditors committee.
The official committee and its legal representatives have a right to be heard
on all matters that come before the Bankruptcy Court.
At this time, it is not possible to predict the effect of the Chapter 11
reorganization process on our business, various creditors and security holders,
or when it may be possible to emerge from Chapter 11. Our future results are
dependent upon our confirming and implementing, on a timely basis, a plan of
reorganization. The Company believes, however, that under any reorganization
plan, the Company's common stock would likely be substantially if not
completely diluted or cancelled as a result of the conversion of debt to equity
or with respect to any other compromise of interests. Further, it is also
likely that the Company's senior notes and convertible subordinated notes will
suffer substantial impairment.
The ultimate recovery, if any, by creditors, security holders and/or common
shareholders will not be determined until confirmation of a plan or plans of
reorganization. No assurance can be given as to what value will be ascribed in
the bankruptcy proceedings to each of these constituencies. Accordingly, Exide
urges that appropriate caution be exercised with respect to existing and future
investments in any of these securities.
The consolidated financial statements contained herein have been prepared on
a going concern basis, which assumes continuity of operations and realization
of assets and satisfaction of liabilities in the ordinary course of business.
The ability of the Company to continue as a going concern is predicated, among
other things, on the confirmation of a reorganization plan, compliance with the
provisions of the DIP Credit Facility, the ability of the Company to generate
the required cash flows from operations and, where necessary, obtaining
financing sources sufficient to satisfy future obligations. As a result of the
Chapter 11 filing, and consideration of various strategic alternatives,
including possible assets sales, the Company expects that any reorganization
plan will likely result in material changes to the carrying amount of assets
and liabilities in the consolidated financial statements.
General Discussion of Business
Exide Technologies is a Delaware corporation organized in 1966 to succeed to
the business of a New Jersey corporation founded in 1888. Our principal
executive offices are located at 210 Carnegie Center, Suite 500, Princeton, NJ
08540.
3
The Company is one of the largest volume producers of lead acid batteries in
the world, with fiscal 2002 net sales of approximately $2.4 billion. Our
European, North American and Pacific Rim operations represented approximately
48%, 47% and 5%, respectively, of our fiscal 2002 net sales. We manufacture and
supply industrial and transportation batteries in North America, Europe, the
Middle East, India, Australia and New Zealand. Our industrial batteries consist
of motive power batteries, such as those for use in material handling
applications and other electric vehicles, and network power batteries used for
telecommunication, industrial and military applications.
Acquisition of GNB
On September 29, 2000, the Company acquired GNB Technologies, Inc. ("GNB"),
a U.S. and Pacific Rim manufacturer of both industrial and transportation
batteries, from Pacific Dunlop Limited. The acquired GNB operations are located
in the U.S., Australia, New Zealand, Canada, Europe, Japan, South Asia, China,
India and the Middle East. The former GNB businesses manufacture industrial
batteries in North America, including those used in both motive and network
power applications under various brands such as Absolyte(R), Marathon(R),
Sprinter(R), Champion(R) and Pacific Chloride(R). The former GNB operations
also manufacture transportation batteries under the Champion(R), Stowaway(R)
and National(R) brands, among others, including private label brands, and is a
supplier to automotive original equipment manufacturers in North America and
the Pacific Rim.
(2) Financial Information about Segments
For fiscal 2002, we were primarily engaged in the manufacture, distribution
and sale of lead acid batteries in three global business segments: Motive
Power, Network Power and Transportation. See Note 21 to the Company's
Consolidated Financial Statements appearing elsewhere herein.
(3) Narrative Description of Business
Our strategic focus is customer energy storage and application needs on a
global basis. We have three primary business segments: Motive Power, Network
Power and Transportation.
Motive Power Segment
Sales of Motive Power batteries represented approximately 20% of our net
sales for fiscal 2002. We believe we have a leading market position in the
motive power segment of the worldwide industrial battery market, based on our
estimate of current market share.
Product performance and customer service are very important in the Motive
Power markets. We work closely with our customers as they develop new products,
designing batteries to meet their needs. While we established our current
market position primarily by acquiring existing manufacturers with established
brand names, we plan to market our products under global brands and establish a
reputation for quality, product technology and service.
Our Motive Power batteries are composed of two-volt cells assembled in
numerous configurations and sizes to provide capacities ranging from 30 Ah to
1500 Ah. We also manufacture and market a range of 6 and 12 volt monobloc
batteries used on smaller material handling vehicles, access equipment and
electrically-powered wheelchairs. Exide offers conventional vented lead acid
technology utilizing tubular positive-plate and flat plate cell design. Exide
also offers a range of lead acid battery technologies to meet a wide spectrum
of customer application requirements. For example, Exide provides monobloc
batteries incorporating gelled electrolyte and copper-stretched metal
technology (CSM) for high performance applications. In addition, we provide
maintenance-free sealed batteries incorporating absorbed glass mat (AGM)
technology under the Champion(R) brand name.
4
The materials handling industry is the largest market for Motive Power
batteries, including forklifts, electric counter balance trucks, pedestrian
pallet trucks, low level order pickers, turret trucks, tow tractors, reach
trucks and very narrow aisle (VNA) trucks.
Other market segments requiring Motive Power products include:
scrubber/dryer and sweeper machines in the floor cleaning market, scissor
lifts, access platforms and telescopic zooms in the access market, buggies and
carts in the golf market, mobility equipment in the wheelchair market, mining
locomotives, electric road vehicles, electric boats and non-military
submersible vehicles.
In addition to our Motive Power battery products, Exide offers a range of
battery chargers, watering and maintenance equipment and battery transfer
equipment.
The motive power battery market in Europe is divided into the original
equipment manufacturer ("OEM") market, comprised of the manufacturers of the
electric vehicles described above, and the replacement market, which includes
large users of such electric vehicles as well as original equipment dealer
networks. The majority of our sales are to OEMs. Our major original equipment
motive power customers in Europe include the materials handling operations of
the Linde Group (Germany), Junghreinrich Group (Germany), Atlet (Sweden) and BT
Rolatruc (Sweden). We also sell our Motive Power products to a wide range of
customers in the aftermarket, ranging from large industrial concerns and retail
distributors to small warehouse and manufacturing operations.
In Europe, we provide Motive Power products and services through
company-owned sales and service organizations in each country and utilize
distributors and agents for export of products from Europe to the rest of the
world. In addition, we distribute Motive Power batteries through OEM dealers,
independent distributors and directly to large fleet users.
The European motive power market has developed due to a trend toward
electric (rather than internal combustion) material handling vehicles and from
the growth of warehousing and logistics service providers. This market is
served primarily through OEMs rather than end users. Additionally, with the
advent of the Euro and the attendant greater price transparency, the OEM truck
manufacturers have been able to exert additional competitive pressure by
standardizing prices throughout Europe.
In North America, the Motive Power business is served primarily through
independent lift truck dealers or sold directly to large national accounts or
end users. Our customers include Nacco, Crown, Wal-Mart, Kroger and Ford Motor
Company.
The North American product range includes the conventional vented lead acid
technology utilizing the flat plate cell design, the tubular positive-plate
design from our European Motive Power business, and Champion sealed
maintenance-free batteries and chargers.
Motive Power products and services are provided in North America through
company-owned sales and service locations which are augmented by a network of
independent manufacturers' representatives who provide local service on their
own behalf.
The European and North American motive power markets are heavily influenced
by the demand for materials handling equipment. Customer demand for materials
handling equipment has a strong historical correlation to general economic
conditions.
5
Network Power Segment
Sales of Network Power batteries represented approximately 17% of our net
sales for fiscal 2002.
Network Power (also known as standby or stationary) batteries are used for
back-up power applications to ensure continuous power supply in case of main
(primary) power failure or outage. Today's examples of where network power
batteries are used to provide backup power include telecommunications,
computers, hospitals, process control, air traffic control, security systems,
utility, railway and military applications.
One of the largest network power markets is telecommunications. Customers
for network power batteries for telecom applications include manufacturers of
switches and other equipment and the system operators. Battery demand for
telecommunications has until recently been fueled by the growth in internet
broadband connections and worldwide deployment of multiple cellular and
wireless mobile communication systems where each repeater system and base
transceiver station may require a set of standby batteries. Other
telecommunications applications include central and local switching systems
(PABX), satellite stations, optical fiber repeating boxes, cable TV
transmission boxes and radio transmission stations. In these applications, the
batteries are usually packaged with a 48V DC power system.
The telecommunications industry and network power battery demand has
experienced a significant downturn during the last year, which the Company does
not expect will reverse in the near term. As a result, during the third quarter
of fiscal 2002 the Company recorded goodwill impairment charges based upon its
assessment of the fair value of the Network Power reporting unit against book
carrying value. Further deterioration in industry performance, particularly in
Europe, could result in additional impairment charges in future periods. See
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Network power batteries also serve as uninterruptible power supplies (UPS)
used in computer installations for banks, airlines and back up servers for the
internet. UPS battery customers consist of system manufacturers and end users.
Performance in this market is impacted by the demand for computer systems.
Our major network power battery customers include:
. telecommunications companies, such as AT&T, China Unicom, Cingular,
Nippon Telegraph and Telephone (NTT), Qwest, Singapore Telecom, Telecom
Italia, Telefonica of Spain and Verizon;
. manufacturers of telecommunications equipment, such as Alcatel, Ericsson,
Marconi, Motorola and Nokia;
. manufacturers and end users of UPS, primarily for mainframe computer
systems, such as MGE and Siemens;
. electrical generating companies; and
. government and military users.
We sell our products directly to these customers and promote our products by
holding seminars, participating in trade shows and distributing technical
literature.
Given the importance of service and technical assistance, we generally ship
network power batteries directly to system suppliers and UPS manufacturers who
include the batteries in their original equipment and distribute products to
end users. Batteries are also shipped directly to end users for both systems
and the replacement of aged batteries.
6
Today we offer a global product line which is being marketed under the
following five brands associated with product type and technology:
.. Absolyte(R): Large 2-volt sealed cells, incorporating AGM technology, for long duration (e.g.
telecom) and short duration applications.
.. Marathon(R): Multi-cell AGM monobloc batteries for long duration applications.
.. Sprinter(R): Multi-cell AGM monobloc batteries for short duration applications.
.. Sonnenschein(R): Multi-cell monoblocs and 2-volt cells, incorporating Gel technology, primarily
for long duration applications.
.. Classic(TM): Multi-cell monoblocs and 2-volt cells, using traditional flooded construction,
primarily for large installation and long duration applications.
There are two primary Network Power lead acid battery technologies:
valve-regulated (VRLA, or sealed) and vented (flooded). There are also two
types of VRLA technologies--GEL and AGM.
These technologies are described as follows:
Product Description
VRLA: GEL This technology utilizes a gel electrolyte. Sealed batteries have replaced other types of
network power batteries because they enhance safety, reduce maintenance and can be
used in both vertical and horizontal positions. The Sonnenschein gel technology offers the
advantages of high reliability and long life. The gel product range offers a wide range of
capabilities such as heat resistance, deep discharge resistance, long shelf life and high
cyclic performance.
VRLA: AGM This technology utilizes an electrolyte immobilized in an absorbent glass mat separator.
This technology is particularly well adapted to shorter back-up time and can offer up to a
20-year design life.
Vented This technology is used in applications requiring high reliability but with the ability to
(Flooded) allow for regular maintenance. The basic construction involves positive flat or tubular
positive plates. Transparent containers and easily accessible internal construction are
features of these batteries that allow end users to check the battery's physical condition.
Exide is also one of the leading suppliers of submarine batteries. Our
customers include the navies of Denmark, France, Germany, Italy, Norway,
Singapore, Spain, Sweden, Turkey, and we are the sole supplier to the U.S. Navy
for submarine batteries.
Transportation Segment
Transportation batteries include starting, lighting and ignition (SLI)
batteries for cars, trucks, off-road vehicles, agricultural and construction
vehicles, motorcycles, recreational vehicles, boats, and other applications.
Transportation batteries represented approximately 63% of our net sales for
fiscal 2002.
In North America, we are the second largest manufacturer of transportation
batteries. In Europe, we are one of the largest manufacturers of transportation
batteries. The market is divided between sales to OEMs and aftermarket
customers. We market our products under various trademarks including Exide(R),
Champion(R), Stowaway(R), SubZero(R), Trailblazer(R), Willard(R), Tudor(R),
DETA(R), Centra(R), Fulmen(R) and Prestolite(R) and many private label brands
for customers. We also produce and market the Exide Select(R), including the
Exide Select Orbital(R) battery.
Transportation: Original Equipment Manufacturer (OEM) Market
The OEM market consists of the sale of batteries to manufacturers of
automobiles and trucks, buses and off-road agricultural and construction
vehicles. The factors affecting the OEM market are consumer demand for
7
passenger cars, light trucks and sport utility vehicles; significant
consolidation in the automotive industry; globalization of OEM procurement
activities and competition.
Our major OEM customers in North America include DaimlerChrysler, Ford Motor
Company, Toyota, Kenworth, Peterbilt, John Deere International, Volvo Cars of
North America and Case/New Holland.
Our major OEM customers in Europe are Fiat, Volkswagen Group, the PSA group
(Peugeot S.A./Citroen), Renault/Nissan, BMW and Ford.
Transportation: Aftermarket
We sell aftermarket batteries in North America through automotive parts
retailers and mass merchandisers, car and truck dealers, and wholesale
distributors who supply service stations, repair shops, automotive and
farm-equipment dealers, and small retailers. We also provide transportation
batteries for commercial applications, such as trucks, farm equipment, tractors
and off-road vehicles, as well as batteries for marine, lawn and garden and
motorcycle applications.
Demand for conventional automotive replacement batteries is influenced by
the following principal factors: (1) the number of vehicles in use, (2) average
battery life, (3) the average age of vehicles and their condition, (4) seasonal
weather conditions and (5) general population growth and economic conditions.
The ratio of battery usage to vehicles in use has increased slightly in recent
years, reflecting higher average miles of vehicle usage and an increasing
number of vehicles used in warm climates. Aftermarket demand is more stable
than the original equipment market since it is not affected by the cyclical
nature of new vehicle demand. The replacement market is also larger in general
than the original equipment segment, since automotive batteries tend to require
replacement every three to five years.
We market our aftermarket batteries in North America to a broad range of
retailers and distributors. We are a leading supplier to NAPA, Wal-Mart, Sam's
Club, Kmart, and CSK Inc. We are also a supplier of authorized replacement
batteries for DaimlerChrysler, Mopar, Freightliner and John Deere International.
Our North American aftermarket operations include a company-owned branch
network. This branch network throughout the United States and Canada which
sells and distributes batteries and other products to local auto parts
retailers, service stations, repair shops, fleet operators, battery specialists
and installers. The branches may also deliver batteries to our national account
customers' retail stores and collect used and spent batteries for recycling.
Our primary North American transportation battery products include the
following:
Product Description
Exide(R) Champion(R) and These batteries include a comprehensive range of vented, maintenance-free lead acid
private label batteries, from a basic battery to a premium battery with enhanced power cold
cranking amps and a 72 month warranty. These batteries are sold under the
Champion(R) and Exide(R) brand name as well as various private labels.
Exide NASCAR Select(R) Our Exide NASCAR Select(R) batteries are officially licensed by NASCAR. Our
and Champion Champion Trailblazer(R) batteries are targeted at light trucks and SUV vehicles. Both
Trailblazer(R) the Champion Trailblazer(R) and the Exide NASCAR Select(R) batteries include a
number of features differentiating them from conventional batteries, including
increased durability, resistance to vibration and battery performance and life.
Exide Select Orbital(R) Through its patented spiral wound technology and state-of-the-art recombinant
design, this battery can be recharged in a fraction of the time needed for conventional
batteries, and has high power output and superior vibration resistance compared with
a conventional lead acid battery.
8
Batteries used for marine and recreational vehicles include the Stowaway(R)
and Nautilus(R) brands, which employ technology to satisfy the power
requirements of large engines, sophisticated electronics and on-board
accessories. For the marine market, we produce the Exide Select Orbital(R)
Marine, which brings all the advantages of Exide's patented spiral wound
technology to the marine market. The Exide Select Orbital(R) Marine maintains
nearly a full charge during the off-season, and can be quickly recharged. This
battery is also sealed, making it ideal for closed environments (such as inside
a boat hull). The Exide Select Orbital(R) Marine battery is complemented by the
Stowaway(R) Powercycler(R), which was the first sealed, AGM battery introduced
in the marine battery market. The Stowaway(R) Powercycler(R) is a completely
sealed, VRLA battery with AGM technology and prismatic plates that offers
features and benefits similar to the Exide Select Orbital(R). We also produce
the Nautilus(R) Gold Dual Purpose and the Stowaway(R) Dual Purpose, a
combination battery, replacing separate starting and deep cycle batteries in
two-battery marine and recreational vehicle systems, and the Nautilus(R) Mega
Cycle and Stowaway(R) Deep Cycle, a high performance, dual terminal
battery.
We sell aftermarket batteries in Europe primarily through battery
wholesalers, OEM dealer networks, hypermarkets, European purchasing centers and
oil companies. Wholesalers and OEM dealers have traditionally represented the
majority of this market, but supermarket chains, replacement-parts stores
(represented by purchasing associations) and hypermarkets have become
increasingly important. Battery wholesalers now sell and distribute batteries
to a network of automotive parts retailers, service stations, independent
retailers, and supermarkets throughout Europe.
Demand for conventional automotive replacement batteries in the European
aftermarket is affected by the same major factors influencing the aftermarket
in North America. In Europe, mass merchandisers have gained market share in
recent years. Buying groups representing smaller battery resellers have grown
and begun to expand. The European aftermarket is less concentrated than in
North America at the present time and we believe Exide is well-positioned to
supply mass merchandisers, buying groups and individual resellers.
We have a leading position in the automotive aftermarket in most European
countries and our customers include ADI, KWIK FIT and many other leading
aftermarket battery distributors. We sell our aftermarket batteries in Europe
under a variety of well-known brand names, including Exide, Fulmen, DETA,
Tudor, SONNAK, and Centra.
In Europe, our product offerings vary by market. We generally offer a basic
model, an upgrade model, a premium model and various niche products in each
market. Exide has five major Company-owned brands in Europe. Exide(R) and
Tudor(R) are promoted as pan-European brands, whereas Deta(R), Centra(TM) and
Fulmen(TM) have strong local awareness levels.
The following describes our product offerings in the United Kingdom and is
representative of our product offerings elsewhere in Europe:
Product Description
Basic(TM) This is our basic model. It uses traditional lead acid technology, has average power
and cold-cranking capabilities, carries a 12-month warranty and is adequate for
most conventional automotive uses. The same or similar battery is marketed under
private label brand names in France, Germany and Spain, under the Basic name in
Italy and under various other names in other markets.
Classic(TM) This is our upgrade model. It still uses traditional lead acid technology, and has
increased power and cold-cranking capabilities. This battery carries a 24-month
warranty. The same or similar batteries are marketed under the Equipe name in
France, the Classic name in Germany, the Leader name in Italy, the Tudor name in
Spain and under various other names in other markets.
9
Product Description
Ultra(TM) This is our premium model. It has a number of added features including higher
power and a 36-month warranty. The same or similar batteries are marketed under
the Formula name in France, the Top Start Plus name in Germany, the Ultra name
in Italy, the Millennium 3 name in Spain and under various other names in other
markets.
STR/STE(TM) Our STR/STE batteries use recombination technology to allow a lead acid battery to
be installed in the passenger compartment of an automobile with little or no fluid
loss or acid fumes under normal operating conditions. Our STE technology was
approved for use by BMW and was included in some models beginning with the
2000 model year.
Maxxima(TM) This is the equivalent of the Exide Select Orbital(R) described above. We market this
battery under the Maxxima brand name throughout Europe.
Quality
We recognize that product performance and quality are critical to our
success and we have undertaken a company-wide quality improvement effort. In
April 2001, the Company launched its EXCELL (Exide's Customer-focused
Excellence Lean Leadership) program to systematically eliminate waste and
implement the concepts of continuous flow and customer pull throughout the
entire Exide supply chain. The EXCELL initiative is intended to implement lean
production and other quality improvements. The system, now being implemented at
62 Exide facilities worldwide, also incorporates best practices to improve
product quality, workplace safety and regulatory compliance. The best processes
include Kaizen (continuous improvement); mistake proofing; quality control
process charting; total productive maintenance; business process
re-engineering; one piece flow; standard work; six sigma (measure of variance);
quick changover; 5S (everything has a place and everything in its place); and
visual factory.
Our quality effort begins in the design phase with an in depth understanding
of customer and application requirements. Our batteries are designed to the
required performance, industry and customer quality standards, using design
processes, tools and materials to achieve reliability and durability. Our
commitment to quality continues through our manufacturing process. We have
quality audit processes and standards in each of our production facilities. We
have established an employee Lead Quality Continuous Improvement Team, and many
of our plants have established quality-related incentive plans for hourly
employees. Our quality program extends past the point of sale. We offer
warranties on our products, inservice product evaluations, and we conduct
customer satisfaction surveys.
Most of our major production facilities are approved under ISO 9000, QS 9000
or equivalent quality standards. Also, we have obtained ISO 14001 certification
at eight of our manufacturing plants, including TS16949 certification at three
of these facilities. We have received quality certification from Renault, PSA
Group, BMW, VW/Audi and Fiat and Q1 approval from Ford. In addition, several of
our plants are AQAP approved by the military organizations of different
countries. We have received quality certifications from many Network Power
customers such as NTT and Motorola.
Research and Development
We are committed to developing new and technologically advanced products,
services and systems that provide superior performance and value to our
customers. To support this commitment, we focus significant attention on
developing opportunities across our global businesses.
10
We have focused our global research and development activities into a
central facility in Europe. Scientists and engineers at this facility are
currently focused on projects to enhance the lead acid battery technology for
the benefit of the entire Company.
In addition, we also operate a number of product and process-development
centers around the world. These centers work cooperatively to define and
improve our product design and production processes.Examples of projects
currently underway include continuous grid making processes, battery assembly
automation and productivity and product improvement programs. By leveraging
this network, we have been able to transfer technologies, product and process
knowledge among our various operating facilities, thereby adapting best
practices from around the world for use throughout the Company.
In addition to our in-house efforts, we are forming alliances and
collaborative partnerships to pursue knowledge developments. One example of
this strategy is the collaborative agreement with Siemens VDO Automotive AG
announced on September 24, 2001 to develop energy-management systems for 14-
and 42-volt automotive electrical and electronic architectures for the global
OEM market. Through this partnership, the companies intend to co-develop and
market products and systems designed to optimize electrical-energy management
in vehicles, such as advanced software and state-of-charge/state-of-health
sensors. Other new vehicle technologies creating demand for 42-volt power
include electric power steering, electromechanical brakes and advanced
electrically-controlled heating and air conditioning systems.
The Company has established similar arrangements with Lear Corporation and
Valeo in the Transportation area.
Patents, Trademarks and Licenses
We own or have a license to use various trademarks that are valuable to our
business. At present we own more than 800 trademarks and license the right to
use fewer than 50 trademarks worldwide. While we believe these trademarks and
trade names enhance the brand recognition of our products and are therefore
important to our business, we do not believe any of these individually are
material to our business. An unaffiliated company has rights to use the
Exide(R) mark in approximately 37 foreign countries and Exide Electronics
Group, Inc., an unaffiliated company, is licensed to use the Exide(R) name on
certain devices. These licenses are not, however, material to the conduct of
our business or results of operations.
We have generated a large number of patents in the operation of our business
and currently own all or a partial interest in more than 800 patents worldwide.
We also have more than 1,000 applications for patents pending. Although we
believe our patents and patent applications collectively are important to our
business and that technological innovation is important to our market
competitiveness, currently no patent individually is material to operation of
the business or its financial condition.
At the present time, the Company is not engaged to any significant extent in
commercialization of its technology or brand names.
Manufacturing, Raw Materials and Suppliers
Lead is the primary material by weight used in the manufacture of lead acid
batteries, representing approximately one-fourth of the cost of goods produced.
We obtain substantially all of our North American lead requirements through the
operation of our six secondary lead recycling plants, which reclaim lead by
recycling spent lead acid batteries. In North America, batteries are obtained
for recycling from our customers and through our Company-owned branch networks.
The Company is party to three supply agreements with Daramic, Inc.
("Daramic") expiring in December 2009 for the purchase of separators, a
critical component of battery manufacturing. The agreements restrict the
11
Company's ability to source separators from other suppliers and provide for
substantial minimum annual purchase commitments. The Company purchases
substantially all of its separator requirements from Daramic and the Company
does not believe there exists a readily available alternative source or sources
of supply for the volume of separators Daramic provides. As a result, any
substantial disruption in supply from Daramic would likely have a material
adverse impact on the Company. In May 2002, Daramic filed a motion in the
Bankruptcy Court to compel the Company to accept or reject the supply
agreements. Following negotiation with Daramic, the Company agreed to pay
approximately $10 million due with respect to the period prior to the Company's
Chapter 11 filing and, subject to Bankruptcy Court approval, to accept the
contracts with certain agreed upon amendments.
Other key raw materials and components in the production of batteries
include lead oxide, acid, plastics and chemicals, which are generally available
from multiple sources. We have not experienced any material stoppage or
disruption in production as a result of the unavailability, or delays in the
availability, of raw materials.
Competition
Motive Power Segment
Exide has the largest market share for motive power products on a global
basis. The Hawker Battery Group acquired in 2001 by EnerSys is number two in
Europe. Other competitors in Europe include Fiamm, Hoppecke, BAE and MIDAC.
Exide ranks second to Enersys in market share in North America. In North
America, the other major competitors are C&D Technologies and East Penn. In
Asia, JSB, Panasonic, Yuasa and Hitachi are the major competitors with Yuasa
being the market leader. In countries such as Brazil, China and India, local
manufacturing is required and Exide is currently serving these markets on a
limited basis through export sales.
Quality, reliability, delivery and price are important differentiators in
the motive power market along with technical innovation and responsive service.
Well-known brands are also important and Exide's Chloride Motive Power, Deta,
GNB, Tudor and Sonnenschein are among the leading brands in the world.
Network Power Segment
EnerSys, following the acquisition of Hawker Battery Group in 2001, has the
largest market share on a global basis with Exide ranking second in the world.
Exide ranks second to C&D Technologies in North America and maintains the
leading share in Europe. In Asia, Yuasa has a market leadership position.
Competition in this segment has intensified given the recent slowdown and
decline in the industry demand for batteries.
Quality, reliability, delivery and price are important differentiators in
the network power market, along with technical innovation and responsive
service. Well-known brands are also important and Exide's Absolyte(R),
Sonnenschein(R), Marathon, Sprinter and Classic are among the leading brands in
the world.
The Company is implementing a plant rationalization and overhead reduction
program, as well as lean manufacturing and strategic sourcing initiatives, to
better enable it to respond to the changing market conditions.
Transportation Segment
The North American and European transportation markets are highly
competitive. The manufacturers in these markets compete primarily on price,
quality, technical innovation, service and warranty. Well-recognized brand
names are also important for aftermarket customers who do not purchase private
label batteries. Most sales are made without long-term contracts.
In the North American Transportation aftermarket, we believe Johnson
Controls has the largest market position, followed by Exide. Other principal
competitors in this market are Delphi Automotive Systems and East
12
Penn. Price competition in this market has been severe in recent years.
Competition is strongest in the mass merchandiser channel where large customers
use their buying power to command lower prices.
Our largest competitors in the North American OEM market are Delphi
Automotive Systems and Johnson Controls. OEMs change battery suppliers less
frequently than aftermarket customers but, because of their size, can influence
market participants to compete on price and other terms.
Exide has the largest market position in Europe in automotive batteries,
both aftermarket and original equipment. Our next largest single competitor in
the automotive markets is Varta, followed by Fiamm and Hoppecke.
The European battery markets, particularly in the automotive OEM and
industrial areas, have undergone severe price competition.
We expect competition to remain intense. We seek to maintain and grow our
market positions and customer base through strong brands, improved product
performance, quality, customer service and cost reduction.
Environmental, Health and Safety Matters
The Company, particularly as a result of its manufacturing, distribution and
recycling operations, is subject to numerous environmental laws and regulations
and is exposed to liabilities and compliance costs arising from its past and
current handling, releasing, storing and disposing of hazardous substances and
hazardous wastes. The Company's operations are also subject to occupational
safety and health laws and regulations, particularly relating to monitoring of
employee health. The Company devotes resources to attaining and maintaining
compliance with environmental and occupational health and safety laws and
regulations and does not currently believe environmental, health or safety
compliance issues will have a material adverse effect on the Company's
business, financial condition or results of operations. The Company believes
that it is in substantial compliance with all material environmental, health
and safety requirements.
Because environmental liabilities are not accrued until a liability is
determined to be probable and reasonably estimable, not all potential future
environmental liabilities have been included in the Company's environmental
reserves and, therefore, additional earnings charges are possible. Also, future
findings or changes in estimates could have a material effect on the recorded
reserves and cash flows.
North America
The Company has been advised by the U.S. Environmental Protection Agency or
state agencies that it is a "Potentially Responsible Party" ("PRP") under the
Comprehensive Environmental Response, Compensation and Liability Act or similar
state laws at 90 federally defined Superfund or state equivalent sites
(including 16 former GNB sites). At 61 of these sites, the Company has either
paid or is in the process of paying its share of liability. In most instances,
the Company's obligations are not expected to be significant because its
portion of any potential liability appears to be minor or insignificant in
relation to the total liability of all PRPs that have been identified and are
financially viable. The Company's share of the anticipated remediation costs
associated with all of the Superfund sites where it has been named a PRP, based
on the Company's estimated volumetric contribution of waste to each site, is
included in the environmental remediation reserves discussed below.
Because the Company's liability under such statutes may be imposed on a
joint and several basis, the Company's liability may not necessarily be based
on volumetric allocations and could be greater than the Company's estimates.
Management believes, however, that its PRP status at these Superfund sites will
not have a material adverse effect on the Company's business or financial
condition because, based on the Company's experience, it is reasonable to
expect that the liability will be roughly proportionate to its volumetric
contribution of waste to the sites.
13
The Company currently has greater than 50% liability at three Superfund
sites. Other than these sites, the Company's allocation exceeds 5% at seven
sites for which the Company's share of liability has not been paid as of March
31, 2002. The current allocation at these seven sites averages approximately
22%.
The Company is also involved in the assessment and remediation of various
other properties, including certain Company owned or operated facilities. Such
assessment and remedial work is being conducted pursuant to a number of state
and federal environmental laws and with varying degrees of involvement by state
and federal authorities. Where probable and reasonably estimable, the costs of
such projects have been accrued by the Company, as discussed below. In
addition, certain environmental matters concerning the Company are pending in
federal and state courts or with certain environmental regulatory agencies.
International
The Company is subject to numerous environmental, health and safety
requirements and is exposed to differing degrees of liabilities, compliance
costs, and cleanup requirements arising from its past and current activities in
various international locations including Europe. The laws and regulations
applicable to such activities differ from country to country and also
substantially differ from U.S. laws and regulations. The Company believes that
it is in substantial compliance with all material environmental, health and
safety requirements in each country.
The Company expects that its international operations will continue to incur
capital and operating expenses in order to maintain compliance with evolving
environmental, health and safety requirements or more stringent enforcement of
existing requirements in each country.
Consolidated
While the ultimate outcome of the foregoing environmental matters is
uncertain, after consultation with legal counsel, management does not believe
the resolution of these matters, individually or in the aggregate, will have a
material adverse effect on the Company's long-term business, financial
condition or results of operations.
The Company has established reserves for on-site and off-site environmental
remediation costs and believes that such reserves are adequate. As of March 31,
2002 the amount of such reserves on the Company's consolidated balance sheet
were $70.5 million. Of this amount, $56.3 million was included in other
non-current liabilities.
In the United States, the Company has advised each state and federal
authority with whom we have negotiated plans for environmental investigations
or remediation of the Company's Chapter 11 filing as required by those
agreements or applicable rules. In some cases these authorities may require the
Company to undertake certain agreed remedial activities under a modified
schedule, or may seek to negotiate or require modified remedial activities.
Such requests have been received at several sites and are the subjects of
ongoing discussions. At this time no requests or directives have been received
which, individually or in the aggregate, would alter the Company's reserves or
have a material adverse effect on the Company's business, financial condition
or results of operation.
Employees
Total worldwide employment was approximately 17,300 at March 31, 2002,
compared to 20,000 at March, 2001, reflecting the impact of the Company's
ongoing restructuring actions and cost reduction efforts.
North America. As of March 31, 2002, we employed approximately 1,700
salaried employees and approximately 4,700 hourly employees in North America.
Approximately 40% of such salaried employees are engaged in sales, service,
marketing and administration and approximately 60% in manufacturing and
14
engineering. Approximately 23% of our hourly employees are represented by
unions. Relations with the unions are generally good. Contracts covering
approximately 700 of our union employees expire in fiscal 2003, and the
remainder thereafter.
Europe. As of March 31, 2002, we employed approximately 3,900 salaried
employees and approximately 6,400 hourly employees in Europe. Approximately 75%
of such salaried employees are engaged in sales, service, marketing and
administration and approximately 25% in manufacturing and engineering. Our
hourly employees are generally represented by unions. Relations with the unions
are generally good. Contracts covering most of our European union employees
expire on various dates through calendar year 2002.
Backlog
Our Network Power and Motive Power order backlog at March 31, 2002 was
approximately $72 million and $12 million, respectively. We expect to fill
virtually all of the March 31, 2002 backlog during fiscal 2003. Our
transportation backlog at March 31, 2002 was not significant.
Financial Information About Foreign and Domestic Operations and Export Sales
See Note 21 to the Company's consolidated financial statements appearing
elsewhere herein.
15
Item 2. Properties
The chart below lists the location of our principal facilities. All of the
facilities are owned unless otherwise indicated. Substantially all of our owned
and leased properties in the U.S. are subject to liens or security interests
under the DIP Credit Facility and/or the Pre-Petition Senior Secured Credit
Facility, and two owned facilities located in England are subject to liens
under the Pre-Petition Credit Facility. The leases for leased facilities expire
at various dates through 2016.
Approximate
Location Square Footage Use
-------- -------------- ---
North America:
Alpharetta, GA............ 51,300 (leased) Executive Offices
Baton Rouge, LA........... 176,000 Secondary Lead Smelting
Bollingbrook, IL.......... 55,000 (leased) Distribution Center
Bristol, TN............... 631,000 Battery Manufacturing
Cannon Hollow, MO......... 137,000 Secondary Lead Smelting
City Of Industry, CA...... 159,000 (leased) Distribution Center
Florence, MS.............. 138,000 Battery Manufacturing
Fort Erie, Canada......... 90,000 Distribution Center
Fort Smith, AR............ 223,000 (leased) Industrial Battery Manufacturing
Frisco, TX................ 132,000 Secondary Lead Smelting
Kankakee, IL.............. 270,000 Industrial Battery Manufacturing
and Distribution
Kansas City, KS........... 140,000 Industrial Battery Manufacturing
Lampeter, PA.............. 82,000 Battery Plastics Manufacturing
Lombard, IL............... 62,000 (leased) Executive Offices
Manchester, IA............ 286,000 Battery Manufacturing
Distribution Center
Muncie, IN................ 174,000 Secondary Lead Smelting
Princeton, NJ............. 18,000 (leased) Executive Offices
Reading, PA............... 125,000 Secondary Lead smelting and Poly
Reprocess
Reading, PA............... 77,000 Distribution Center
Salina, KS................ 260,000 (leased) Battery Manufacturing
Salina, KS................ 100,000 (leased) Distribution Center
Shreveport, LA............ 280,000 (leased) Battery Manufacturing
Sumner, WA................ 50,000 Distribution Center
Vernon, CA................ 220,000 Secondary Lead Smelting
Europe and Other:
Sydney, Australia......... 230,000 Industrial Battery Manufacturing/
Distribution Center
Elizabeth, South Australia 145,000 Automotive Battery Manufacturing
Bolton, England........... 274,000 Industrial Battery Manufacturing
Auxerre, France........... 341,358 Automotive Battery Manufacturing
Gennevilliers, France..... 60,494 Executive Offices
Gennevilliers, France..... 20,149 Research and Executive Offices
Lille, France............. 409,828 Industrial Battery Manufacturing
Nanterre, France.......... 206,022 Automotive Battery Manufacturing
Peronne, France........... 106,369 Plastics Manufacturing
Bad Lauterberg, Germany... 1,303,002 Manufacturing, Administrative and
Warehouse
Budingen, Germany......... 928,171 Industrial Battery Manufacturing
and Administration
16
Approximate
Location Square Footage Use
-------- -------------- ---
Weiden, Germany................. 1,087,153 Industrial Battery Manufacturing
Avellino, Italy................. 47,000 Automotive Battery Manufacturing
Canonica d'Adda, Italy.......... 203,000 Automotive Battery Manufacturing
Casalnuovo, Italy............... 5,155,908 Industrial Battery
Fumane di Valipolicella, Italy.. 65,000 Industrial Battery Manufacturing
Romano Di Lombardia, Italy...... 266,000 (leased) Automotive Battery Manufacturing
Lower Hutt, New Zealand......... 90,000 Automotive Battery Manufacturing
Poznan, Poland (five)........... 847,500 Automotive Battery Manufacturing
Castanheira do Riatejo, Portugal 1,872,918 Industrial Battery Manufacturing
Azuqueca de Henares, Spain...... 1,782,548 Automotive Battery Manufacturing
Bontmati, Spain................. 63,000 Secondary Lead Smelting
La Cartuja, Spain............... 1,670,000 Industrial Battery Manufacturing
Cubas de la Sagra, Spain........ 1,860,000 Secondary Lead Smelting
Malpica, Spain.................. 213,000 Automotive Battery Manufacturing
Manzanares, Spain............... 438,000 Automotive Battery Manufacturing
San Esteban de Gormaz, Spain.... 63,000 Secondary Lead Smelting
Torrejon, Spain................. 64,583 Industrial Battery Manufacturing
Manisa, Turkey.................. 184,063 Automotive Battery Manufacturing
Cwmbran, Wales.................. 105,000 Automotive Battery Manufacturing
In addition, we also lease distribution outlets in the U.S. and Europe.
We believe that our facilities are in good operating condition, adequately
maintained, and suitable to meet our present needs.
Item 3. Legal Proceedings
Bankruptcy Considerations
As of the Petition Date, substantially all pending litigation against the
Debtors was stayed. We cannot predict what action, if any, the Bankruptcy Court
may take with respect to pending litigation.
Former Senior Executives of the Company: Arthur M. Hawkins, Douglas N.
Pearson and Alan E. Gauthier.
Exide established a $13.4 million reserve in fiscal 2000 to cover litigation
related to allegations that used batteries were sold as new. The Company has
resolved these claims, including the third quarter fiscal 2002 settlement of
the sole remaining "legacy" action, Houlihan v. Exide. As a result of the
Houlihan settlement, the Company recorded an additional expense in the third
quarter of fiscal 2002 of $1.4 million for reimbursement of legal fees. At
March 31, 2002, there is approximately a $2.5 million reserve remaining,
representing the Company's estimate of its remaining obligations under the
Houlihan and other "legacy" settlements.
On March 23, 2001, Exide reached a plea agreement with the U.S. Attorney for
the Southern District of Illinois, resolving an investigation of the conduct of
certain former senior executives of the Company. Under the terms of that
settlement Exide agreed to pay a fine of $27.5 million over five years, to
five-year's probation and to cooperate with the U.S. Attorney in her
prosecution of Arthur M. Hawkins, Douglas N. Pearson and Alan E. Gauthier,
former senior executives of the Company. The payment terms of the plea
agreement are dependent upon the Company's compliance with the plea agreement
during the five-year probation period. Generally, the terms of the probation
would permit the U.S. Government to reopen the case against Exide if the
Company violates the terms of the plea agreement or other provisions of law.
The plea agreement was lodged with the U.S. District Court for the Southern
District of Illinois, and accepted on February 27, 2002. The Company reserved
17
$31.0 million for this matter, including expected costs and out-of-pocket
expenses, in the first quarter of fiscal 2001, and an additional $1.0 million
in the third quarter of fiscal 2002. At March 31, 2002, approximately
$27.5 million of this reserve remains. As a result of the imposition of the
automatic stay arising upon the Company's Chapter 11 filing, the Company has
not made the first installment payment of its $27.5 million fine. The Company
is uncertain as to the effect of this non-payment and the bankruptcy filing
with respect to the plea agreement.
Exide is currently involved in litigation with the former senior executives
referenced above. The former senior executives made claims to enforce
separation agreements, reimbursements of legal fees, and other contracts, and
Exide has filed claims and counterclaims asserting fraud, breach of fiduciary
duties, misappropriation of corporate assets and civil conspiracy. In addition,
Exide has filed an action in the Bankruptcy Court against the former senior
executives to recover certain payments of legal fees Exide was required to
advance to such individuals prior to the Petition Date.
The Company has filed a claim with its insurers for reimbursement of the
amounts paid to the former executives, and believes it is entitled to obtain
substantial reimbursement for those amounts. However, the Company has not
recognized any receivable for such reimbursements at March 31, 2002.
Hazardous Materials
Exide is involved in several lawsuits pending in state and federal courts in
South Carolina, Pennsylvania, Indiana, and Tennessee. These actions allege that
Exide and its predecessors allowed hazardous materials used in the battery
manufacturing process to be released from certain of its facilities, allegedly
resulting in personal injury and/or property damage.
The following lawsuits of the above type were filed on August 25, 1999 in
the Circuit Court for Greenville County, South Carolina and are currently
pending: Joshua Lollis v. Exide; Buchanan v. Exide; Agnew v. Exide; Patrick
Miller v. Exide; Kelly v. Exide; Amanda Thompson v. Exide; Jonathan Talley v.
Exide; Smith v. Exide; Lakeisha Talley v. Exide; Brandon Dodd v. Exide; Prince
v. Exide; Andriae Dodd v. Exide; Dominic Thompson v. Exide; Snoddy v. Exide;
Antoine Dodd v. Exide; Roshanda Talley v. Exide; Fielder v. Exide; Rice v.
Exide; Logan Lollis v. Exide and Dallis Miller v. Exide. The following lawsuits
of this type are currently pending in the Court of Common Pleas for Berks
County, Pennsylvania: Grillo v. Exide, filed on May 24, 1995; Blume v. Exide,
filed on March 4, 1996; Esterly v. Exide, filed on May 30, 1995 and Saylor v.
Exide, filed on October 18, 1996. The following lawsuit of this type is
currently pending in the United States District Court for the Southern District
of Indiana: Strange v. Exide. Finally, the following lawsuit of this type is
pending in the Circuit Court of Shelby County, Tennessee: Cawthon v. Exide, et
al. Discovery in the South Carolina and Pennsylvania cases is ongoing;
discovery has not yet begun in the Indiana and Tennessee cases.
The Company's preliminary review of these claims suggest they are without
merit, and the Company plans to vigorously defend itself in these matters. The
Company does not believe any reserves are currently warranted for these claims.
See Critical Accounting Policies and Estimates, Litigation, in Item 7 of this
Report.
GNB Acquisition
In July 2001, Pacific Dunlop Holdings (US), Inc. ("PDH") and several of its
foreign affiliates (the "Sellers") under the various agreements through which
Exide and its affiliates acquired GNB, filed a complaint in the Circuit Court
for Cook County, Illinois alleging breach of contract, unjust enrichment, and
conversion against Exide and three of its foreign affiliates. The Sellers
maintain they are entitled to approximately $16.4 million in cash assets
acquired by the defendants through their acquisition of GNB. In December 2001,
the Court denied the defendants' motion to dismiss the complaint, without
prejudice to re-filing the same motion after discovery proceeds. The defendants
have filed an answer and a counterclaim. On July 8, 2002, the Court authorized
discovery to proceed as to all parties except Exide. To the extent this action
implicates Exide's interests, management plans to vigorously defend the action
and pursue the counterclaim.
18
In December 2001, PDH filed a separate action in the Circuit Court for Cook
County, Illinois seeking recovery of about $3.1 million for amounts allegedly
owed by Exide under various agreements between the parties. The claim arises
from letters of credit and other security for workers compensation insurance
policies allegedly provided by PDH for GNB's performance of certain of GNB's
obligations to third parties, that PDH claims Exide was obligated to replace.
Exide's answer contested the amounts claimed by PDH and Exide filed a
counterclaim. Although this action has been consolidated with the Cook County
suit concerning GNB's cash assets, the claims relating to this action are
currently subject to the automatic bankruptcy stay.
Other
On June 6, 2002, McKinsey & Company International filed suit against Exide
Holding Europe, S.A., Compagnie Europeene D'accumulateurs, S.A., Euro Exide
Corporation Ltd., Exide Italia S.r.l, Deutsche Exide GmbH and Exide
Transportation Holding Europe, S.L. in the United States District Court for the
Southern District of New York, seeking to compel arbitration of McKinsey's
request for payment of approximately $5 million in consulting fees. The Company
intends to defend the suit and denies liability thereunder.
Exide is a defendant in an arbitration proceeding initiated in October of
2001, by Margulead Limited ("Margulead"). In June of 1997, GNB, now an
operating division of Exide, entered into an agreement with Margulead to build
a facility to test and develop certain lead acid battery recycling technology
developed by Margulead. This agreement was terminated by Exide after the
Margulead technology failed to meet initial performance criteria. Margulead now
alleges breach of contract and has requested damages in the amount of
approximately $2.6 million, which represents the projected cost of building a
testing facility. Margulead has indicated that it may amend its claim to seek
up to $9.0 million in damages. Because Margulead is a foreign entity and the
arbitration is pending in London, the arbitration is currently proceeding
notwithstanding Exide's Chapter 11 proceedings. The Company intends to defend
the claim and denies liability thereunder.
The Company is involved in various other claims and litigation incidental to
the conduct of its business. Based on consultation with legal counsel,
management does not believe that any such claims or litigation to which the
Company is a party, either individually or in the aggregate, will have a
material adverse effect on the Company's financial condition, cash flows or
results of operations, although quarterly or annual operating results may be
materially affected.
Item 4. Submission of Matters to a Vote of Security Holders
None.
19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock is currently traded on the over-the-counter market and
quoted on the OTC Bulletin Board under the symbol "EXDTQ". Prior to delisting
on February 15, 2002 the Company's common stock had been traded on the New York
Stock Exchange. The following table presents the high and low sales prices for
our common stock as reported on the consolidated transaction reporting system
and dividends declared for the quarters indicated. The Company's Board of
Directors suspended payment of dividends on the common stock on November 8,
2001.
Fiscal Year Ending March 31
---------------------------
Sales Prices
--------------- Dividends
High Low Declared
------- ------- -----------
(per share)
2000:
First Quarter.. $16.375 $10.000 $0.02
Second Quarter. 14.625 9.375 0.02
Third Quarter.. 11.125 7.438 0.02
Fourth Quarter. 17.500 7.438 0.02
2001:
First Quarter.. $12.063 $ 7.750 $0.02
Second Quarter. 10.500 6.875 0.02
Third Quarter.. 10.188 6.875 0.02
Fourth Quarter. 10.906 7.297 0.02
2002:
First Quarter.. $12.300 $ 7.600 $0.02
Second Quarter. 11.000 3.650 0.02
Third Quarter.. 3.890 0.390 0.00
Fourth Quarter. 1.490 0.320 0.00
The last reported sale price of the common stock on the OTC Bulletin Board
on August 14, 2002 was $0.58 per share. As of August 14, 2002 we had 27,383,084
shares of our common stock outstanding and there were 731 record holders of
common stock.
20
Item 6. Selected Financial Data (In thousands, except per share data):
The following table sets forth selected financial data for Exide. You should
read this information in conjunction with our consolidated financial statements
and notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" that appear elsewhere in this document. The selected
financial information for the fiscal years ending March 31, 1998 and 1999 has
been restated. See Note 2 to the Consolidated Financial Statements herein.
Fiscal Year Ended March 31,
----------------------------------------------------------
1998 1999 2000 2001 2002
---------- ---------- ---------- ---------- ----------
Statement of Operations Data
Net sales............................... $2,273,126 $2,374,278 $2,194,447 $2,432,102 $2,428,550
Gross profit............................ 604,091 559,256 533,263 584,027 510,317
Selling, marketing and advertising
expenses.............................. 311,683 334,638 319,476 340,616 337,355
General and administrative expenses..... 135,606 169,744 145,770 157,459 178,842
Restructuring and other................. -- -- 39,336 113,166 33,122
Operating income (loss)(4).............. 145,732 6,006 (19,560) (36,678) (168,556)
Interest expense, net................... 112,301 111,679 103,988 117,652 136,241
Income taxes............................ 14,010 23,001 10,769 8,632 (1,422)
Income (loss) before extraordinary loss
and cumulative effect of change in
accounting principle.................. 19,535 (126,693) (136,042) (164,585) (303,586)
Extraordinary loss (1)(2)............... (28,513) (301) -- -- --
Cumulative effect of change in
accounting principle (3).............. -- -- -- -- (496)
Net income (loss)....................... $ (8,978) $ (126,994) $ (136,042) $ (164,585) $ (304,082)
Basic net income (loss) per share....... $ (0.44) $ (5.98) $ (6.40) $ (7.02) $ (11.35)
Diluted net income (loss) per share..... $ (0.42) $ (5.98) $ (6.40) $ (7.02) $ (11.35)
Other Financial Data
Cash provided by (used in):
Operating activities................ $ 167,499 $ 77,219 $ 95,648 $ 90,190 $ (6,665)
Investing activities................ (76,182) (22,356) (12,623) (355,920) (58,462)
Financing activities................ (95,446) (70,238) (73,987) 259,468 73,720
Capital expenditures.................... 87,315 76,211 63,953 69,495 61,323
Cash dividend per Share................. $ .08 $ .08 $ .08 $ .08 $ .04
Balance Sheet Data (at period end)
Working capital (deficit) (5)........... $ 518,922 $ 301,663 $ 213,468 $ 183,618 $ (951,866)
Property, plant and equipment, net...... 535,113 543,702 443,344 632,935 530,220
Total assets............................ 2,331,549 2,195,816 1,901,461 2,298,925 1,915,868
Total debt.............................. 1,248,983 1,205,806 1,118,385 1,347,046 1,413,272
Common stockholders' equity
(deficit)............................. 274,954 134,135 (66,376) (256,639) (555,742)
- --------
(1) During fiscal 1998, the Company recorded a loss of $28,513 (net of a tax
benefit of $3,667) resulting from a modification of debt in connection with
entering a bond swap agreement for $21,000 (principal amount) of its 10%
Senior Notes; the retirement of its 10.75% Senior Notes and the remainder
of its 12.25% Senior Subordinated Deferred Coupon Debentures; the
retirement of the U.S. Credit Agreements and European Facilities Agreement
in connection with entering into the Senior Secured Global Credit
Facilities Agreement; a modification of debt in connection with reducing
the maximum commitment on the European Facilities Agreement; and the
redemption of $108,119 (face value) of its outstanding 12.25% Zero-Coupon
Bonds.
(2) During fiscal 1999, the Company recorded a loss of $301 with no income tax
effect resulting from a modification of debt in connection with entering
into bond swap agreements for $4,430 (principal amount) of its 10% Senior
Notes.
(3) The cumulative effect of change in accounting principle resulted from the
adoption by the Company of SFAS 133 on April 1, 2001.
(4) Fiscal 2002 operating loss included goodwill impairment charges of $105,000
and loss on debt-to-equity conversion of $13,873.
(5) Working capital (deficit) is calculated as current assets less current
liabilities, which at March 31, 2002 reflects the reclassification of
certain long-term debt as current.
21
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
On April 15, 2002, the Debtors filed voluntary petitions for reorganization
under Chapter 11 of the Bankruptcy Code as it offered the most efficient
alternative to restructure its balance sheet and access new working capital
while continuing to operate in the ordinary course of business. The Company
incurred a heavy debt burden, caused largely by a debt-financed acquisition
strategy and the significant costs of integrating those acquisitions. Other
factors leading to the reorganization included the impact of current adverse
economic conditions, particularly in the telecommunications industry, ongoing
competitive pressures, and recent capital market volatility. These factors
contributed to a loss of revenues and has resulted in significant operating
losses and negative cash flows, severely impacting the Company's financial
condition and its ability to maintain compliance with debt covenants.
The Company's operations outside of the U.S. are not included in the Chapter
11 proceedings.
On May 10, 2002 the Company received final Bankruptcy Court approval of the
$250 million DIP Credit Facility. The DIP Credit Facility requires maintenance
of certain financial covenants and other restrictions on matters such as
indebtedness, guarantees and future sale of assets.
Under the Bankruptcy Code, actions to collect pre-petition indebtedness, as
well as most other pending litigation, are stayed. In addition, the Debtors may
also assume or reject executory contracts, including lease obligations, subject
to the approval of the Bankruptcy Court and certain other conditions (see, Item
1. Business, Overview in this Report).
Factors Which Affect Our Financial Performance
Competition. The global Transportation, Motive Power and Network Power
battery markets, particularly in North America and Europe, are highly
competitive. In recent years, competition has continued to intensify and we
continue to come under increasing pressure for price reductions. This
competition has been exacerbated by excess capacity and fluctuating lead prices
as well as low-priced Asian imports impacting our markets.
Exchange Rates. We are exposed to foreign currency risk in most European
countries, principally from fluctuations in the Euro and British Pound. We are
also exposed, although to a lesser extent, to foreign currency risk in
Australia and the Pacific Rim. Movements of exchange rates against the U.S.
dollar can result in variations in the U.S. dollar value of our non-U.S. sales.
In some instances, gains in one currency may be offset by losses in another.
Our results for the periods presented herein were adversely impacted by the
overall weakness in European currencies.
Markets. We are subject to concentrations of customers and sales in a few
geographic locations and are dependent on customers in certain industries,
including the automotive, telecommunications, and material handling markets.
Economic difficulties experienced in these markets and geographic locations
have and continue to impact our financial results.
Weather. Unusually cold winters or hot summers accelerate automotive
battery failure and increase demand for automotive replacement batteries.
Interest rates. We are exposed to fluctuations in interest rates on our
variable rate debt.
Lead. Lead is the primary material by weight used in the manufacture of
batteries, representing approximately one-fourth of our cost of goods sold. The
market price of lead fluctuates. Generally, when lead prices decrease,
customers may seek disproportionate price reductions from us, and when lead
prices increase, customers may resist price increases.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and results
of operations are based upon the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the
22
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and the related disclosure of
contingent assets and liabilities. On an ongoing basis, the Company evaluates
its estimates based on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
The Company believes the following critical accounting policies and
estimates affect the preparation of its consolidated financial statements.
Inventory Reserves. The Company writes down its inventory for estimated
obsolescence or unmarketable inventory equal to the difference between the cost
of the inventory and the estimated market value based upon assumptions of
future demand and market conditions. If actual market conditions are less
favorable than those projected by management, additional inventory write-downs
may be required. During the third quarter of fiscal 2002 we began a
company-wide effort to reduce inventory levels. Based on those findings, the
Company concluded that it would not recover the carrying costs of certain of
this excess inventory. This excess inventory has been written down to its
estimated recoverable value. As this effort continues we may determine that
actual recoveries differ from those estimated.
Valuation of Long-lived Assets. The Company's long-lived assets include
property, plant and equipment, goodwill and identified intangible assets.
Long-lived assets (other than goodwill and indefinite lived intangible assets)
are depreciated over their estimated useful lives, and are reviewed for
impairment whenever changes in circumstances indicate the carrying value may
not be recoverable. Goodwill and indefinite-lived intangible assets are
reviewed for impairment on both an annual basis and whenever changes in
circumstances indicate the carrying value may not be recoverable. The fair
value of goodwill and indefinite-lived intangible assets are based upon our
estimates of future cash flows and other factors including discount rates to
determine the fair value of the respective assets. If these assets or their
related assumptions change in the future, we may be required to record
impairment charges. An erosion of future business results in any of our
business units could create impairment in goodwill or other long-lived assets
and require a significant write down in future periods.
Deferred Taxes. The Company records a valuation allowance to reduce our
deferred tax assets to the amount that is more likely than not to be realized.
While we have considered future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for valuation allowances, if we
were to determine that we would be able to realize deferred tax assets in the
future in excess of our net recorded amount, an adjustment to the deferred tax
asset would increase income in the period such determination was made.
Likewise, should we determine that we would not be able to realize all or part
of our net deferred tax assets in the future, an adjustment to the deferred tax
asset would decrease income in the period such determination was made.
Warranty Reserves. The Company recognizes a provision for the estimated
cost of product warranties in the period in which the related revenue is
recognized. While we engage in product quality programs and processes,
including independent testing of product performance and compliance to ratings,
our warranty obligation is affected by product failure rates and customers'
in-store return policies and procedures. In addition, should actual product
return rates or the lag between the date of sale and claim/return date differ
from our estimates, revisions to estimated warranty reserves would be required.
Environmental Reserves. The Company is subject to numerous environmental
laws and regulations in all the countries in which it operates. In addition, we
can be held liable for investigation and clean up of sites impacted by our past
operating activities. In certain countries including the United States we
maintain reserves for the reasonable cost of addressing these liabilities.
These estimates are determined through a combination of methods, including
outside estimates of likely expense and our historical experience in the
management of these matters.
23
Because environmental liabilities are not accrued until a liability is
determined to be probable and reasonably estimable, not all potential future
environmental liabilities have been included in the Company's environmental
reserves and, therefore, additional charges are possible. Also future findings
or changes in estimates could result in either an increase or decrease in the
reserves and have a significant impact on the Company's liquidity.
Purchase Commitments. The Company has three worldwide supply agreements,
expiring in December 2009 to purchase its battery separators. The supply
agreements were entered into in fiscal 2000 with Daramic, the party that
purchased the Company's battery separators manufacturing operation as a
condition of the sale of those operations. At the time of the sale, the
agreements contained minimum annual purchase commitments in excess of the
Company's requirements. Accordingly, the Company established a reserve, and
reduced the gain on sale of the manufacturing operations, for commitments in
excess of the Company's requirements and for the contractual purchase prices in
excess of market. We currently have a reserve for the incremental purchase
requirements over the remaining life of the agreement in excess of our
projected requirements. Whenever there is a significant change in our unit
volume outlook based on changes to our business plan, this reserve will be
adjusted.
Litigation. The Company has legal contingencies that have a high degree of
uncertainty. When a contingency becomes probable and estimable a reserve is
established. Numerous allegations have been made against the Company claiming
bodily harm as a result of exposure to hazardous materials used in the
manufacture of batteries. In addition, in connection with the acquisition of
GNB, certain purchase price and other disputes are outstanding. The Company
believes that liabilities for these matters are neither probable nor estimable.
Therefore, no reserves have been established. If these matters are resolved
differently, they could have a significant impact on the Company's future
results and liquidity.
Going Concern. The accompanying consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
On April 15, 2002 the Debtors filed voluntary petitions for reorganization
under Chapter 11 of the Bankruptcy Code as it offered the most efficient
alternative to restructure its balance sheet and access new working capital
while continuing to operate in the ordinary course of business. The Company has
a heavy debt burden, caused largely by a debt-financed acquisition strategy and
the significant costs of integrating those acquisitions. Other factors leading
to the reorganization included the impact of current adverse economic
conditions on the Company's markets, particularly the telecommunications
industry, ongoing competitive pressures, and recent capital market volatility.
These factors contributed to a loss of revenues and has resulted in significant
operating losses and negative cash flows, severely impacting the Company's
financial condition and its ability to maintain compliance with debt covenants.
The ability of the Company to continue as a going concern is predicated
upon, among other things, on confirmation of a bankruptcy reorganization plan,
compliance with the provisions of both the DIP Credit Facility and other
ongoing borrowing arrangements as well as the ability to generate cash flows
from operations, possible asset sales and where necessary obtaining financing
sources sufficient to satisfy the Company's future obligations. As a result of
the Chapter 11 filing, and consideration of various strategic alternatives,
including possible asset sales, the Company would expect that any
reorganization plan will likely result in material changes to the carrying
amount of assets and liabilities in the consolidated financial statements.
The consolidated financial statements do not, however, include adjustments,
if any, to reflect the possible future effects on the recoverability and
classification of recorded assets or the amounts and classifications of
liabilities that may result from the outcome of these uncertainties. In
addition, since the Company and certain of its U.S. subsidiaries filed for
protection under the Bankruptcy Code subsequent to March 31, 2002, the
accompanying consolidated financial statements have not been prepared in
accordance with SOP 90-7, "Financial Reporting by Entities in Reorganization
under the Bankruptcy Code" ("SOP 90-7"), and do not include disclosures of
liabilities subject to compromise. Consolidated financial statements prepared
subsequent to the filing date under Chapter 11 will be prepared reflecting such
amounts subject to compromise.
24
In preparing the consolidated financial statements, because the Company did
not believe it would be in compliance with certain financial covenants included
in the Company's Senior Secured Credit facility upon expiration of waivers on
April 15, 2002, the Company has classified those obligations of the Debtors
under the Senior Secured Credit Facility as short-term at March 31, 2002. In
addition, the Company classified its 10% Senior Notes and Convertible Senior
Subordinated Notes as short-term at March 31, 2002.
Results of Operations
Fiscal Year Ended March 31, 2002 compared with Fiscal Year Ended March 31, 2001
Overview
Net loss for fiscal 2002 was $304.1 million, or $11.35 per diluted share
versus net loss of $164.6 million or $7.02 per diluted share last year.
Included in the consolidated net loss for fiscal 2002 is a non-cash third
quarter charge of $105.0 million for goodwill impairment resulting from our
evaluation of results of the Network Power business and our expectations that
the current depressed telecommunication markets will not recover to fiscal year
2001 levels. Since March 31, 2002 the Company has experienced a deterioration
in the performance of its European Network Power business. The Company
evaluated the impact of these market conditions on the business and recorded a
further goodwill impairment charge in its Network Power segment in first
quarter fiscal 2003 results. Also included in Fiscal 2002 results is a non-cash
charge of $13.9 million for a debt-to-equity conversion. Results also include
restructuring and other merger related costs of $33.1 million and $113.2
million in fiscal 2002 and 2001, respectively.
Net Sales
Net sales were $2,428.6 million for fiscal 2002 versus $2,432.1 million in
fiscal 2001. On a pro-forma basis including GNB's operations for the first six
months of fiscal 2001, net sales for fiscal 2001 would have been $489.3 million
higher. This decrease resulted from lower sales volumes in all three of the
Company's business segments during fiscal 2002. Net sales were also negatively
impacted by $37.0 due to the weaker Euro.
Transportation net sales were $1,518.1 million for fiscal 2002 versus
$1,522.5 million last year. On a pro-forma basis including GNB's net sales for
the first six months of fiscal 2001, fiscal 2001 net sales would have been
$267.5 million higher. The decrease results from lower sales volume in North
America due to the following events: 1) our decision to discontinue certain
less profitable aftermarket accounts, which impacted sales volumes beginning in
the first quarter of fiscal 2001; 2) volume losses attributable to difficulties
in meeting certain second quarter fiscal 2002 customer orders as plants and
product lines continued to be integrated due to the GNB acquisition which
culminated with certain customers switching all or a portion of their
requirements to other suppliers; 3) unseasonably mild weather throughout North
America that negatively impacted consumer demand; 4) two battery retailers,
Kmart and Quality Stores experienced financial difficulties that negatively
impacted their order volumes; 5) the general downturn in the economy extenuated
by the September 11th crisis and 6) uncertainties related to the Company's
financial position. Currency negatively impacted Transportation net sales in
fiscal 2002 by approximately $17.0 million.
Motive Power net sales for the fiscal 2002 were $475.2 million versus $449.4
million last year. On a pro-forma basis including GNB's net sales for the first
six months of fiscal 2001, fiscal 2001 net sales would have been $74.3 million
higher. The decrease results from lower sales volumes due to the general
softness in the overall economies in Motive Power's two major markets: The
United States and Western Europe. Currency negatively impacted Motive Power net
sales in fiscal 2002 by approximately $11.1 million.
Network Power net sales for fiscal 2002 were $435.2 million versus $460.2
million last year. On a pro-forma basis, including GNB's net sales for the
first six months of fiscal 2001, fiscal 2001 net sales would have been $147.5
million higher. The decrease reflects significantly weaker demand, principally
in the North American telecommunications market during fiscal 2002. Currency
negatively impacted Network Power net sales in fiscal 2002 by approximately
$8.9 million.
25
Gross Profit
Gross profit was $510.3 million in fiscal 2002 versus $584.0 million last
year. On a pro-forma basis, including GNB's gross profit for the first six
months of fiscal 2001, gross profit in 2001 would have been $89.2 million
higher. The gross profit margin decreased to 21.0% in fiscal 2002 from 24.0% in
fiscal 2001, primarily due to the addition of the less profitable GNB
Transportation business, reduced sales volumes, higher production costs related
to under-absorption of fixed overheads and certain fiscal 2002 purchase
commitments and inventory charges. Weaker European currencies versus the U.S.
dollar impacted gross profit by approximately $8.5 million.
Transportation gross profit was $272.4 million in fiscal 2002 versus $303.6
million last year. On a pro-forma basis, including GNB's gross profit of $16.2
million in the first six months of fiscal 2001, gross profit in fiscal 2001
would have been $319.8 million. Lower North American sales volumes combined
with higher production and logistics costs due to plant and product line
integration, and planned reductions in the production schedule in the second
half to bring inventory levels in balance with expected future demand adversely
impacted results. Gross profit was further reduced by a $15.5 million charge to
costs of sales to increase reserves for purchase commitments (See Note 17) and
charges to write-down excess inventories of approximately $3.0 million from
ongoing inventory rationalization efforts. Gross margins were 17.9% in the
current year versus 19.9% in the prior year. Currency negatively impacted
Transportation gross profit margin by approximately $3.9 million.
Motive Power gross profit was $128.7 million in fiscal 2002 versus $137.5
million last year. On a pro-forma basis, including GNB's gross profit of $17.9
million for the first six months of fiscal 2001, gross profit for fiscal 2001
would have been $155.4 million. Gross profit was negatively impacted by lower
sales volumes and higher production costs related to under-absorption of fixed
overheads. Gross margin as a percent of net sales was 27.1% in the current year
versus 30.6% last year. The addition of higher margin GNB Motive Power products
was offset by higher production costs related to under-absorption of fixed
overheads, pricing pressures and an unfavorable product mix. Currency
negatively impacted Motive Power gross profit margin by approximately $3.3
million.
Network Power gross profit was $109.2 million this year versus $143.0
million last year. On a pro-forma basis including GNB's gross profit of $55.1
million in the first six months of fiscal 2001, fiscal 2001 gross profit would
have been $198.1 million. Lower sales volumes and higher production costs
related to under-absorption of fixed overheads negatively impacted results. In
addition gross profit was negatively affected by a $3.0 million charge to
writedown excess inventories in connection with our company-wide program to
significantly reduce inventories and a $2.2 million charge to write-off
inventory in our operation in China. Gross margin as a percent of net sales was
25.1% in the current year versus 31.1% last year. The decline in gross profit
margins was the result of higher production costs related to the under
absorption of fixed overheads, pricing pressure and an unfavorable product mix.
Currency negatively impacted Network Power gross profit margin by approximately
$1.3 million.
Operating Expenses
Operating expenses increased from $620.7 million in fiscal 2001 to $678.9
million in fiscal 2002. Fiscal 2002 operating expenses included the goodwill
impairment of Network Power of $105.0 million. Included in operating expenses
are restructuring charges of $113.2 million last year and $33.1 million this
year. GNB had $69.9 million in operating expenses in the first six months of
fiscal 2001. Fiscal 2002 operating expenses were favorably impacted by the
Company's cost-reduction programs and the elimination of goodwill amortization
due to the adoption of FAS 142. Also, weaker European currencies favorably
impacted operating expenses by approximately $13.2 million in fiscal 2002.
Transportation operating expenses decreased from $365.9 million in fiscal
2001 to $282.4 million in fiscal 2002. GNB had $31.9 million of Transportation
operating expenses in the first six months of fiscal 2001. The decrease in
operating expenses are a result of savings from the headcount reductions taken
over the past eighteen
26
months offset by a $12.6 million bad debt provision on our pre-petition
outstanding receivable as a result of Kmart's Chapter 11 bankruptcy filing in
January 2002. Currency favorably impacted Transportation operating expenses by
approximately $3.6 million.
Motive Power operating expenses increased from $108.5 million in fiscal 2001
to $112.4 million in fiscal 2002. GNB had $15.9 million of Motive Power
operating expenses in the first six months of fiscal 2001. Offsetting the
inclusion of GNB operations were savings from the headcount reductions taken
over the past eighteen months. Currency favorably impacted Motive Power
operating expenses by approximately $5.8 million.
Network Power operating expenses increased from $87.2 million in fiscal 2001
to $219.7 million in fiscal 2002. Fiscal 2002 Network Power operating expenses
include the goodwill impairment of $105.0 million. GNB had $21.7 million of
Network Power operating expenses in the first six months of fiscal 2001. The
remaining increase was due to the inclusion of GNB operations and a provision
for bad debts related to our operations in China of $3.4 million, recognized in
the third quarter of fiscal 2002. Currency favorably impacted Network Power
operating expenses by approximately $3.8 million.
Unallocated operating expenses including other (income) expense, net were
$59.1 million in fiscal 2001 versus $64.3 million in fiscal 2002. Current year
operating expenses includes a gain of $8.2 million, due to the Lion Compact
Energy agreement termination. The increase is also impacted by the elimination
of goodwill amortization in fiscal 2002. Goodwill amortization was $14.9
million in fiscal 2001. Other (income) expense, net was $32.7 million in fiscal
2002 versus ($5.5) million in the same period last year. The change was
primarily due to $13.9 million of charges related to debt for equity exchanges
in the current year, refinancing costs incurred in connection with debt waiver
obtained in the current year and prior year gains on asset sales of $18.4
million.
Operating loss was $168.6 million, or (6.9%) of net sales versus operating
loss of $36.7 million, or (1.5%) of net sales last year due to the items
discussed above.
Transportation operating loss was $10.0 million, or (0.7)% of net sales this
year, versus operating loss of $62.3 million, or (4.1)% of net sales last year,
due to the items discussed above.
Motive Power operating income was $16.3 million, or 3.4% of net sales this
year, versus operating income of $29.0 million, or 6.5% of net sales last year,
due to the items discussed above.
Network Power operating loss was $110.6 million, or (25.4)% of net sales,
this year versus operating income of $55.7 million, or 12.1% of net sales, last
year due to the items discussed above.
Interest expense, net
Interest expense, net increased $18.5 million from $117.7 million to $136.2
million due to interest charges related to the GNB acquisition financing and
the accelerated amortization of deferred financing fees recognized during the
third and fourth quarters of fiscal 2002. The additional amortization was a
result of the Company securing a waiver from its senior lenders on January 4,
2002 through April 12, 2002 of certain covenants contained in its Senior
Secured Global Credit Facility. As a result, the Company shortened the
amortization period to coincide with the expiration of the waiver.
Income Taxes
In fiscal 2002, an income tax benefit of $1.4 million was recorded on a
pre-tax loss of $304.8 million. In fiscal 2001, an income tax provision of $8.6
million was recorded on a loss of $154.3 million. The effective tax rate for
the fiscal year 2002 was impacted by the recognition of valuation allowances on
tax benefits generated from current period losses in both the United States and
certain international regions, the tax treatment of the debt for equity
exchanges and the Lion Compact Energy agreement termination as well as the
non-deductibility of the Network Power goodwill impairment charge. As a result
of certain pledges of stock of foreign subsidiaries
27
in connection with bank amendments obtained during fiscal 2002, the Company was
required to recognize certain foreign sourced income ("Subpart F Income") as a
constructive dividend for U.S. tax purposes. The constructive dividend has
otherwise reduced operating loss tax carry-forwards. During fiscal 2002 the
Company reorganized the ownership structure of certain of its foreign
subsidiaries and recorded an impairment charge on certain intercompany
investments for statutory purposes. These actions have no effect on reported
pre-tax operating results but resulted in a net tax benefit.
A net loss of $304.1 million in fiscal 2002 versus a net loss of $164.6
million in the same period last year, resulted from the items discussed above.
Fiscal Year Ended March 31, 2001 Compared with Fiscal Year Ended March 31, 2000
Overview
The Company reported a net loss of $164.6 million, or $7.02 per diluted
share, for fiscal 2001, compared to a net loss of $136.0 million, or $6.40 per
diluted share, for fiscal 2000. These reported results include restructuring
and other merger related charges aggregating $113.2 million in fiscal 2001 and
$39.3 million in fiscal 2000.
On September 29, 2000 the Company acquired GNB for total consideration of
$379.0 million. This acquisition was important to the Company's strategy as it
provided the opportunity for a significant restructuring and integration of the
combined North American Transportation businesses and allowed the Company to
reenter the North American Network and Motive Power businesses as a result of
GNB's strong presence in that market.
Net Sales
Net sales increased 10.8% or $237.7 million to $2,432.1 million for fiscal
2001 versus $2,194.4 million in fiscal 2000. Included in fiscal 2001 year net
sales was the addition of GNB's operations beginning in the third fiscal
quarter. GNB's net sales in the third and fourth quarters of fiscal 2000 were
$460.1 million. Lower Transportation sales were due to reduced volumes and
average selling prices, which more than offset improvements in Motive Power and
Network segments. Net sales in fiscal 2001 were also negatively impacted by
$177.5 million due to weak European currencies versus the U.S. dollar. Net
sales in fiscal 2000 were further reduced by $23.9 million, principally in the
Transportation segment due to charges for warranty reserves recorded in the
fourth quarter.
Net sales in the Transportation segment for fiscal 2001 increased 2.4% to
$1,522.5 million versus $1,486.9 million in fiscal 2000. GNB's net sales in its
Transportation business were $273.1 in the third and fourth quarters of fiscal
2000. The addition of GNB's operations were offset primarily by volume declines
in the aftermarket sector, particularly in North America and lower average
selling prices. Also, currency unfavorably impacted Transportation net sales in
fiscal 2001 by approximately $81.8 million. Net sales in fiscal 2000 were
reduced by $21.8 million in the Transportation segment due to non-cash charges
for a change in estimate of warranty reserves recorded in the fourth quarter.
Motive Power net sales for fiscal 2001 were $449.4 million versus $401.6
million in fiscal 2000. GNB's net sales in its Motive Power business were $62.6
million in the third and fourth quarters of fiscal 2000. Currency negatively
impacted Motive Power net sales in fiscal 2001 by approximately $51.3 million.
The improvement resulted from strong demand and incremental volumes in our
Motive Power markets.
Network Power net sales for fiscal 2001 were $460.2 million versus $306.0
million in fiscal 2000. GNB's net sales in its Network Power business were
$124.4 million in the third and fourth quarters of fiscal 2000. Currency
negatively impacted Network Power net sales in fiscal 2001 by approximately
$44.4 million. The improvement on a constant currency basis resulted from
strong European demand in our network power markets throughout fiscal 2001, as
well as strong demand in North America in the third and fourth quarters of
fiscal 2001, particularly related to telecommunication applications.
28
Gross Profit
Gross profit increased 9.5% to $584.0 million for fiscal 2001 compared to
$533.3 million in the prior year. GNB's gross profit was $70.2 million in the
third and fourth quarters of fiscal 2000. The weaker Euro negatively impacted
gross profit by approximately $51.3 million. The gross profit margin decreased
to 24.0% for fiscal 2001 from 24.3% for fiscal 2000 due to weaker
Transportation gross profit margins offset by strong Motive Power and Network
Power battery operations and cost reduction measures. Gross profit was also
negatively impacted in the current year due to the $7.8 million earnings effect
of recording inventory at market value for the GNB acquisition discussed above.
Fiscal 2000 gross profit also included a charge of $21.6 million for non-core
business divestitures, $11.1 million of asset write-downs and $23.9 million of
charges for changes in the estimate of warranty reserves.
Transportation gross profit was $303.6 million in fiscal 2001 versus $322.2
million in fiscal 2000 with the negative impact of volume declines,
particularly in the North American aftermarket sector, primarily causing this
decrease, along with a currency impact of $22.5 million. GNB's gross profit was
$16.2 million in the third and fourth quarters of fiscal 2000. Gross margins
were 19.9% in fiscal 2001 versus 21.7% in fiscal 2000 with the decrease
primarily attributable to the inclusion of lower GNB profit margins in the
third and fourth quarters of fiscal 2001. As discussed above, the
Transportation segment's results were impacted in fiscal 2000 by charges for
changes in estimates of warranty reserves, the divestiture of certain non-core
businesses and other asset write-downs.
Motive Power gross profit was $137.5 million in fiscal 2001, versus $133.4
million in fiscal 2000. GNB's Motive Power gross profit was $13.2 million in
the third and fourth quarters of fiscal 2000. Strong Motive Power demand in the
current year was offset by $17.2 million in negative currency impact and by the
inventory step-up described above. Gross margin as a percent of net sales was
30.6% in fiscal 2001 versus 33.2% in fiscal 2000.
Network Power gross profit was $143.0 million in fiscal 2001 versus $77.7
million in fiscal 2000. GNB's gross profit in its Network Power business was
$40.7 million in the third and fourth quarters of fiscal 2000. Strong Network
Power demand in the current year was offset by $11.6 million in negative
currency impact and by the inventory step-up described above. Gross margin as a
percent of net sales was 31.1% in fiscal 2001 versus 25.4% in fiscal 2000.
Operating Expenses
Operating expenses increased $67.9 million, from $552.8 million in fiscal
2000 to $620.7 million in fiscal 2001. GNB had $58.5 million of operating
expenses in the third and fourth quarters of fiscal 2000. As discussed above,
in fiscal 2001, the Company recorded restructuring and other merger related
charges totaling $113.2 million. In addition, approximately $31.0 million was
recorded for fines and associated costs resulting from the plea agreement
related to past improper business practices of the Company's former management.
In fiscal 2000 the Company recorded $39.3 million of restructuring charges,
related primarily to the Company's realignment to a customer-focused global
business unit strategy, $13.4 million to cover resolution of "used as new"
claims litigation, and $14.3 million for the write-off of in-process research
and development costs related to the acquisition of a controlling interest in
Lion Compact Energy. Weaker European currencies favorably impacted operating
expenses by approximately $41.4 million in fiscal 2001. Fiscal 2001 operating
expenses were also favorably impacted by cost-reduction programs including the
initial impact of cost reduction efforts related to our restructuring and
integration initiatives program.
Transportation operating expenses increased $56.1 million, from $309.8
million in fiscal 2000 to $365.9 million in fiscal 2001. GNB had $26.5 million
of Transportation operating expenses in the third and fourth quarters of fiscal
2000. The Transportation segment portion of restructuring and other charges in
fiscal 2001 discussed above totaled $96.6 million including $65.6 million for
restructuring and integration initiatives, $31.0 million for the fine and
associated costs resulting from the plea agreement related to past improper
business practices. The Transportation segment portion of restructuring and
other charges in fiscal 2000 discussed above was $27.5 million. Weaker European
currencies favorably impacted Transportation operating expenses in fiscal
29
2001 by approximately $15.9 million. Fiscal 2001 Transportation operating
expenses were also impacted by cost-reduction programs, particularly the
initial impact of cost reduction efforts related to our restructuring and GNB
integration initiatives program.
Motive Power operating expenses increased $9.3 million, from $99.2 million
in fiscal 2000 to $108.5 million in fiscal 2001. GNB had $12.0 million of
Motive Power operating expenses in the third and fourth quarters of fiscal
2000. Weaker European currencies favorably impacted Motive Power operating
expenses by approximately $12.0 million in fiscal 2001 as did general
cost-reduction programs.
Network Power operating expenses increased $19.5 million, from $67.7 million
in fiscal 2000 to $87.2 million in fiscal 2001, resulting from both the GNB
acquisition and costs to support the increased level of activity. GNB had $20.0
million of Network Power operating expenses in the third and fourth quarters of
fiscal 2000. Weaker European currencies favorably impacted Network Power
operating expenses by approximately $9.4 million in fiscal 2001 as did general
cost-reduction programs.
Non-segment operating expenses including other (income) and expense
decreased $17.0 million, from $76.1 million in fiscal 2000 to $59.1 million in
fiscal 2001. Other segment charges in fiscal 2001 included $46.2 million for
restructuring and integration initiatives. In fiscal 2000, other segment
charges included $18.5 million for restructuring charges, the "used as new"
litigation and the write-off of in-process research and development costs.
Fiscal 2001 Other operating expenses were favorably impacted by the weak euro
and by cost-reduction programs, particularly the initial impact of cost
reduction efforts related to our restructuring and integration initiatives
program, offset slightly by additional goodwill amortization related to the GNB
acquisition. Other (income) expense, net was $(5.5) million for Fiscal 2001
versus $16.8 million for 2000. The change was primarily due to higher gains on
asset sales in Fiscal 2001, including $13.0 million from the sale of the
Company's stake in Yuasa, Inc. and $12.6 million in charges related to asset
write-downs and changes in estimates to European balance sheet reserves in
Fiscal 2000.
Operating loss was $36.7 million in fiscal 2001 versus $19.6 million in
fiscal 2000. The higher operating loss was due to the items discussed above.
The Transportation operating loss was $62.3 million, or (4.1)% of net sales
in fiscal 2001 versus operating income of $12.4 million, or 0.8% of net sales
in fiscal 2000 due to the items discussed above.
Motive Power operating income was $29.0 million, or 6.5% of net sales in
fiscal 2001 versus $34.2 million, or 8.5% of net sales in fiscal 2000 due to
the items discussed above.
Network Power operating income was $55.7 million, or 12.1% of net sales in
fiscal 2001 versus $10.0 million, or 3.3% of net sales in fiscal 2000 due to
the items discussed above.
Interest Expense, net
Interest expense increased $13.7 million from $104.0 million to $117.7
million as a result of the impact of additional interest charges related to the
GNB acquisition financing offset partially by the impact of weaker European
currencies.
Income Taxes
In fiscal 2001, income tax expense of $8.6 million was recorded on a loss of
$154.3 million. In fiscal 2000, income tax expense of $10.8 million was
recorded on a loss of $123.5 million. In fiscal 2001 and fiscal 2000 valuation
allowances were recorded on certain deferred tax as